Question

The following demand and supply schedule show the annual U.S. demand and supply schedules for pickup trucks. Refer the schedule and answer the questions that follow.

Price of Truck $ Quantity of Trucks Demanded (Millions) Quantity of Trucks Supplied (Millions)

$20,000    20 14

25,000 18 15

30,000    16 16

35,000 14 17

40,000 12 18

a. Illustrate the demand and supply graph of the Pickup trucks and indicate the equilibrium price and quantity on the graph.

b. Suppose if the price is $25,000, explain the market condition and show it on the graph. Also explain the market adjustment process.

c. Suppose if the price is 35,000, explain the market condition and show it on the graph. Also explain the market adjustment process.  

Answer 1

(a)

In following graph, equilibrium is at point A where Demand and Supply curves intersect with price P0 (= $30,000) and quantity Q0 (= 16 million).

(b)

When Price is $25,000 (= P1), quantity demanded is 18 million (= Q1) and quantity supplied is 15 million (= Q2), leading to a shortage equal to 3 million (= Q1 - Q2). It will put an upward pressure on prices. As price starts rising, quantity demanded starts to fall and quantity supplied starts to rise until equilibrium is restored at point A.

(c)

When Price is $35,000 (= P2), quantity demanded is 14 million (= Q3) and quantity supplied is 17 million (= Q4), leading to a surplus equal to 3 million (= Q4 - Q3). It will put a downward pressure on prices. As price starts falling, quantity demanded starts to rise and quantity supplied starts to fall until equilibrium is restored at point A.